Over the last few weeks, we have observed the devastation from Kogi State flooding in Nigeria, the destruction of parts of Florida USA due to hurricane Ian, the now daily load sharing (power cuts) that has become ‘part of life’ in Johannesburg South Africa, and finally the moves by EU governments to encourage their citizens to reduce energy consumptions in response to the upcoming winter in the midst of the Russia/Ukraine conflict. The effects of climate change are real and so is the urgent need to achieve green sustainable solutions.
Within the real estate space, DFI’s in particular the IFC, are responding to the call to deliver affordable sustainable developments and have established proprietary tools including EDGE, READ and ASHA. Their goal is to encourage the development of green socially impactful and affordable buildings via stakeholder engagements and in the process revamp the existing real estate value chain. One such partnership is IFC’s relationship with its portfolio company International Housing Solutions (IHS), a private equity affordable housing asset manager based out of Johannesburg. IFC invested ZAR2.4 billion (~US$135 million equivalent) in “IHS Fund II”, a strictly affordable housing fund and IHS have pioneered IFC’s EDGE Initiative in South Africa.
EDGE stands for Excellence in Design for Greater Efficiency. Edge certification has the goal of reducing the environmental impact of buildings in three key areas: direct energy consumption, water consumption, and the embodied energy of construction materials by 20% compared to existing base case scenarios in the local environment. This 20% goal is significant especially when considering the fact that the building construction industry is responsible for 40% of the global economy’s natural materials, 35% of the world’s energy consumption, 15% of the global greenhouse gas emissions, and 5% of the world’s water consumption. The EDGE certification program establishes a consistent green building standard and includes a software app for calculations.
One of the most impressive features of EDGE is its ability to help developments achieve sustainability goals affordably, hence ensuring its applicability in the emerging markets. IHS stands out as a successful case study.“We were the first to actually use it, bring it to life and to implement it on our projects” stated Melisa McLean an Investment Manager at IHS who shared her views on the significance of EDGE and other IFC designed tools (ASHA & READ) in increasing sustainable and affordable developments across the continent.
With a rental portfolio of 12-15000 units across fund investments in Namibia, Botswana, South Africa and most recently Kenya, all in the affordable housing space, IHS has succeeded in implementing the EDGE Standard across all their projects. According to Melisa, “We have tailored our specs to really accommodate the EDGE interventions. Whereas a couple of years ago, there was an incremental cost to make a unit EDGE compliant, we are now at a point where essentially each unit is fully compliant to the point where there isn’t any additional cost to apply the EDGE spec 100%.” IHS incorporates EDGE standards in all aspects of their development value chain starting with their deal structures. “We have two types of deal structures”, Melisa explained. “Turnkey deals where we provide an off-take to a developer who develops for us and we buy at a certain price on a fixed-cost basis; in that arrangement, we give them our product specification and they deliver accordingly. We also have a development deal-type structure where we take the development risks and get involved in the development process. EDGE is an essential requirement within the specs for both deal structures.”
Achieving 100% EDGE compliance for all projects was not an easy feat for IHS to accomplish. EDGE Experts who had undergone training and had taken the exam to obtain EDGE Certification were critical for their success. As Melisa elaborated, “in order for you to be successful with EDGE, you must have an EDGE Expert on your team. An EDGE Expert is essentially someone who understands the various interventions, knows how to operate, runs the tool for the different typologies on the project and can then see what the results are. We had to get geared up to be able to manage the process so that’s where the training of the EDGE Expert came in for the tailoring of the design specifications. In this manner, we started to make ourselves more equipped to work with EDGE.”
Beyond the “greater good” of green building solutions is the financial benefit of implementing the EDGE Standard. Efficiently incorporating green solutions can achieve lower overall development costs. This is both beneficial to the developer in terms of lower financing costs, and also to the end user in terms of lower utility costs.The result is cost-savings that can lead to financial premiums via improved access to development financing and terms, as well as potentially increased resale values. The bottom-line cost savings particularly to the end-users served as a key motivation to IHS to incorporate EDGE on allprojects. Melisa confirmed,“we have actually done a lot of calculations where we’ve seen that the savings can translate into a month’s rental per annum.This has been done through monitoring the performance of our units in terms of utility consumption against the base case.In the affordable housing market, that is a huge savings and means a lot to the end-user. Let’s say for example the building rental is 5000 Rand a month, they could be saving between 400 and 500 Rand a month on utility costs. Multiply this by 12 and that is a little bit more than the rental they are paying per month.”Tenants can download an app on their phones to monitor consumption.
IHS now highlights these savings as part of a highly effective promotional feature for their projects – a key product differentiator vis a vis their competitors in the affordable housing space. “We now use it as a marketing tool for all our projects. All our marketing materials refer to EDGE. We mention the benefits; we mention the fact that we can use Solar PV’s, low-flow shower heads, dual flush toilets, you know things that actually the tenant can understand what the impact is going to be.” For tenants, the value adds to an IHS product is a no-brainer. Not only will they be saving money, but in the process, they will be helping to save the environment as well – a true win-win solution!
The EDGE standard has established a competitive advantage for IHS that goes far beyond cost savings. According to Melisa, “It’s the promotional advantage that it gives you; it’s the benefit for the end-user in terms of utility cost savings, and it’s also the social and environmental impact it has in terms of reducing the carbon footprint holistically. The more EDGE-certified buildings you have, the more you are basically creating an environment where you have used less embodied energy and your usage of energy and water is more efficient. As a business being able to say that we invest in socially and environmentally sustainable projects has become our distinctive feature.”
By adhering to green standards, IHS is promoting the long-term sustainability of the environment and social welfare while at the same time helping their customers achieve cost savings. IHS stands out as an example for real estate developers in the emerging market to follow.
Part II in this series will introduce the IFC’s READ (Real Estate Assessment of Developers) and ASHA (Affordable and Socially Sustainable Housing) programs as tools to achieve sustainable and affordable building solutions in emerging markets.
(This is Part I of a two-part series on sustainable and affordable building solutions)
